China MoF’s latest bond targets US investors, extends yield curve
Four-tranche transaction attracts over US$27 billion worth of demand
15 Oct 2020 | Chito Santiago

The People’s Republic of China returned to the US dollar bond market as it priced on October 14 a US$6 billion offering. In doing so, it decided to market the deal directly to US-based institutional investors under a 144A format for the first time since it returned to the international debt capital markets in October 2017.

Similar to the trade done in November 2019, the transaction, issued once again through the Ministry of Finance (MoF), was comprised of four tranches, but this time around, the sovereign decided to extend its yield curve from 20 years to 30 years.

The first tranche was for three years amounting to US$1.25 billion, which was priced at 99.926% with a coupon of 0.40% to offer a yield of 0.425%. This represented a spread of 25 basis points (bp) over US Treasuries and was in line with the final price guidance and 25bp tighter than the initial price range of 50bp area.

The second tranche was for five years amounting to US$2.25 billion. It was priced at 99.734% with a coupon of 0.55% and a yield of 0.604%. This was equivalent to a spread of 30bp over US Treasuries, which was also in line with the final price guidance and 30bp inside the initial price range of the 60bp area.

The third tranche was a 10-year bond amounting to US$2 billion, which was priced at 99.756% with a coupon of 1.20% and a yield of 1.226%. This represented a spread of 50bp over US Treasuries and  was likewise in line with the final price guidance and 25bp tighter than the initial guidance of 75bp area.

The final tranche was for 30 years amounting to US$500 million. It was priced at 98.707% with a coupon of 2.25% to offer a yield of 2.310%. This was equivalent to a spread of 80bp over US Treasuries and was in line with the final price guidance and 30bp back of the initial price range of the 110bp area.

At these pricing levels, the three-year and five-year tranches achieved tighter spreads compared with the November 2019 deal, which were printed with US Treasuries spreads of 35bp and 40bp, respectively. The spread for the new 10-year tenor was similar with that of the previous deal at 50bp.

Despite geopolitical uncertainty ahead, the deal was launched in a favourable market window as the International Monetary Fund just upgraded China’s growth forecast for this year, domestic stock markets have rallied, and domestic consumption has rebounded strongly during the October 1st national day golden week holidays.

With the latest issuance, the MoF continued to build up its US dollar curve by pricing a 30-year tranche. “The MoF’s inaugural euro bond last year had already attracted an exceptionally high share of European and US offshore accounts, especially in the long end,” notes Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank, which acted as one of the joint bookrunners and lead managers for the transaction.

“The 144A format for the US dollar benchmark led to a strong reception from US onshore real money investors, in addition to global SSA [sovereigns, supranationals and agencies] and institutional investors, which had already showed strong interest and support for China issuances in the past three years.”

“The strong demand from a highly diversified investor base spanning across Asia, Europe and the US indicates that the market looks for high-quality investment opportunities and remains confident in the development of China’s economy against the backdrop of the global pandemic and economic downturn,” adds David Yim, head of capital markets for Greater China and North Asia at Standard Chartered, another joint bookrunner and lead manager for the deal.

The issuance generated a combined orderbook of US$27.2 billion across four tranches, with the three-year bond garnering US$8.1 billion from 131 accounts, the five-year bond US$8.6 billion (138 accounts), the 10-year bond US$7.1 billion (163 accounts) and the 30-year bond US$3.4 billion (122 accounts).

And while the MoF chose to access the market in both the 144A and Reg S format this year, allowing the onshore qualified investors in the US to participate, Asian investors continued to account for the largest share of the bond in the three-year, five-year and 10-year tranches with allocation of 64%, 60% and 53%, respectively. On the other hand, distribution in the US totalled 10% for the three-year, 8% for the five-year, and 22% for the 10-year bonds. It was in the 30-year tranche that allocation in the US was the largest at 47% versus 30% in Asia.

Among the deal arrangers, it was notable that HSBC was not included for the first time since the MoF returned to offshore debt markets. All the other 12 banks in the November 2019 trade are mandated in the latest deal, with Citi added to the list. Apart from Deutsche Bank and Standard Chartered, the other joint bookrunners and lead managers are Bank of China, Bank of Communications, China Construction Bank, China International Capital Corporation, BofA Securities, Credit Agricole CIB, CTBC Bank, Goldman Sachs, J.P. Morgan and Mizuho Securities.

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